According to the New England Journal of Medicine, there is a 43% chance that a person who lives beyond the age of 65 will require long-term health care. The U.S. Department of Commerce reports that 8.8 million people over the age of 65 are receiving long-term care at the present time. Of this 8.8 million, 1.3 million are nursing home residents and 7.5 million receive some type of at-home care. The financial implications of long-term health care are significant. Seventy percent of single people who enter a nursing home are impoverished within one year. Fifty percent of all couples are impoverished within one year after a spouse enters a nursing home.
Perhaps the greatest threat of all to retirement security is the high cost of long-term health care. These costs are staggering. For example, a skilled nursing visit in 1990 averaged about $79 per visit, resulting in an annual cost of $12,324 for three skilled nursing visits a week. The average cost of one year at a nursing home is $47,000, but this figure increases dramatically for nursing homes located in major metropolitan areas. Average one-year nursing home costs in the New York City-Long Island Metropolitan Area run close to $78,000.
Nursing home and other long-term health care costs are not covered by Medicare. Medicare will only pay for hospitalization and doctor bills with a deductible that can be covered via any of a number of Medigap insurance policies. When a catastrophic illness or infirmity strikes, and the need for some type of long-term care is inevitable, there are only three funding options: cash, Medicaid, and long-term health care insurance. There is no one “best” funding option for everyone—it really depends upon financial circumstances that are specific to the individual requiring long-term health care.
For individuals who are wealthy and well-to-do, the best option may be to pay for long-term costs with cash, on an as-needed basis. After all, not everyone requires long-term care, and, in this ideal scenario, financial resources would be applied to insurance that is never used. On the other hand, if illness does strike, there are no problems with meeting expenses out-of-pocket. However, if such individuals wish to leave a “nest egg” to one or more heirs, the purchase of a long-term health care insurance policy may prove desirable. In the event of a serious illness, the insurance policy would serve to protect such a “nest egg” from erosion. Medicaid is not a viable funding option for wealthy clients, inasmuch as financial resources must be exhausted as a condition for eligibility.
Medicaid is a federal and state-administered health insurance program for the “poor”. At present, Medicaid pays for the care of two-thirds of all nursing home residents. This is not because a disproportionate number of elderly people are poor. After all, the median income of an elderly couple is $2270 a month—two and a half times the poverty level for a family of two. Rather, it is attributable to the fact that an extended stay in a nursing home impoverishes even those who lived fairly comfortably prior to illness or injury. The cost of an average nursing home is $3333 per month. For the nonpoor elderly, the need for nursing home care often spells the end of financial as well as physical independence.
A person is not eligible to receive assistance from Medicaid unless their assets have been almost completely depleted. The extent to which assets must be “spent down” varies from state to state. All states permit an individual to keep a house, a car, a burial plot, burial funds, and a small amount of cash. However, states differ in terms of the maximum amount of cash savings and income that are allowed. In many states, cash savings are limited to two or three thousand dollars, and a personal monthly needs allowance of $30 or $40 is permitted. Once an individual depletes their assets to the point that they become eligible for Medicaid, they must still spend nearly all of their income—from Social Security benefits, pensions, interest, and dividends—on nursing home care before they can take advantage of the Medicaid program.
Existing financial planning tools provide insufficient information so as to enable one to select an appropriate course of action from the available health care funding alternatives. Instead, these tools merely generate a monthly or annual projection of overall cash flow during retirement. Individuals are then called upon to apply this information to a bewildering array of confusing alternatives. Due to the complexities of managing retirement health care expenses, it is easy for retirees and their families to become confused or overwhelmed at the available options As a result, many individuals do not follow a course of action that is appropriate or financially advantageous for their particular set of circumstances. The present situation is exacerbated in that unexpected health care expenses can lead to financial ruin.